Question 1

Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?

Accepted Answer

Sham transactions can be structured betw

Question 2

If a taxpayer operated an illegal business (not drug trafficking), what expenses can be deducted and what expenses are disallowed?

Accepted Answer

The usual expenses of operatin

Question 3

Martha rents part of her personal residence in the summer for 3 weeks for $3,000. Anne rents all of her personal residence for one week in December for $2,500. Anne is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income.

Accepted Answer

A) True 
 B)False

Question 4

Andrew, who operates a laundry business, incurred the following expenses during the year.
-Parking ticket of $250 for one of his delivery vans that parked illegally.
-Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa.
-DUI ticket of $500 while returning from the rock concert.
-Attorney's fee of $600 associated with the DUI ticket.
What amount can Andrew deduct for these expenses?

Accepted Answer

A)  $0. 
B)  $250. 
C)  $600. 
D)  $1,425. 
E)  None of the above. 
A)  $0. 
B)  $250. 
C)  $600. 
D)  $1,425. 
E)  None of the above.

Question 5

Under the "one­year rule" for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment.

Accepted Answer

A) True 
 B)False

Question 6

An expense need not be recurring in order to be "ordinary."

Accepted Answer

A) True 
 B)False

Question 7

Only under limited circumstances can a loss on the sale of a personal use asset be deducted.

Accepted Answer

A) True 
 B)False

Question 8

Bob and April own a house at the beach. The house was rented to unrelated parties for 8 weeks during the year. April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows:
$\begin{array}{llr}
  \text {Gross rental income  } &&\$4,000\
 \text {  Less: Mortgage interest and property taxes} &\$3,500\
 \text { Other allocated expenses } &2,000&(5,500)\
 \text { Net rental loss } &&(\$1,500)\
\end{array}$

What is the correct treatment of the rental income and expenses on Bob and April's joint income tax return for the current year assuming the IRS approach is used if applicable?

Accepted Answer

A)  A $1,500 loss should be reported. 
B)  Only the mortgage interest and property taxes should be deducted. 
C)  Since the house was used more than 10 days personally by Bob and April, the rental expenses (other than mortgage interest and property taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to the rental use. 
D)  Since the house was used less than 50% personally by Bob and April, all expenses allocated to personal use may be deducted. 
E)  Bob and April should include none of the income or expenses related to the beach house in their current year income tax return. 
A)  A $1,500 loss should be reported. 
B)  Only the mortgage interest and property taxes should be deducted. 
C)  Since the house was used more than 10 days personally by Bob and April, the rental expenses (other than mortgage interest and property taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to the rental use. 
D)  Since the house was used less than 50% personally by Bob and April, all expenses allocated to personal use may be deducted. 
E)  Bob and April should include none of the income or expenses related to the beach house in their current year income tax return.

Question 9

For a vacation home to be classified in the personal/rental use category, what attributes must be present?

Accepted Answer

To be classified in the personal/rental

Question 10

Which of the following is incorrect?

Accepted Answer

A)  Alimony is a deduction for AGI. 
B)  The expenses associated with royalty property are a deduction from AGI. 
C)  Contributions to a traditional IRA are a deduction for AGI. 
D)  Property taxes on taxpayer's personal residence are a deduction from AGI 
E)  All of the above are correct. 
A)  Alimony is a deduction for AGI. 
B)  The expenses associated with royalty property are a deduction from AGI. 
C)  Contributions to a traditional IRA are a deduction for AGI. 
D)  Property taxes on taxpayer's personal residence are a deduction from AGI 
E)  All of the above are correct.

Question 11

If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is correct?

Accepted Answer

A)  No income is included in AGI. 
B)  No expenses are deductible. 
C)  Expenses must be allocated between rental and personal use. 
D)  Only a. and b. are correct. 
E)  a., b., and c. are correct. 
A)  No income is included in AGI. 
B)  No expenses are deductible. 
C)  Expenses must be allocated between rental and personal use. 
D)  Only a. and b. are correct. 
E)  a., b., and c. are correct.

Question 12

Two-thirds of treble damage payments under the antitrust law are not deductible.

Accepted Answer

A) True 
 B)False

Question 13

If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity can be deducted in excess of the gross income from the activity.

Accepted Answer

A) True 
 B)False

Question 14

Legal expenses incurred in connection with rental property are deductions from AGI.

Accepted Answer

A) True 
 B)False

Question 15

The portion of a shareholder­employee's salary that is classified as unreasonable has no effect on the amount of a shareholder­employee's gross income, but results in an increase in the taxable income of the corporation.

Accepted Answer

A) True 
 B)False

Question 16

Agnes operates a Christmas Shop in Atlantic City, NJ. She makes a weekend trip to Vero Beach, FL, for the purpose of determining the feasibility of opening another shop. Her travel expenses are $2,000 (includes $500 for meals). In addition, she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study. Determine the amount of the expenses that Agnes can deduct if:
a. She opens a new shop in Vero Beach.
b. She decides not to open a new shop in Vero Beach.

Accepted Answer

a. Because Agnes is already in the Chris

Question 17

Taylor, a cash basis architect, rents the building in which his office is located for $5,000 per month. He commenced his practice on February 1, 2014. In order to guarantee no rent increases during an 18-month period, he signed an 18-month lease and prepaid the $90,000 on February 1, 2014. How much can Taylor deduct as rent expense for 2014?

Accepted Answer

Taylor is a cash basis taxpayer. Thus, h

Question 18

For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business.

Accepted Answer

A) True 
 B)False

Question 19

Bobby operates a drug trafficking business. Because he has an accounting background, he keeps detailed financial records. What expenses can Bobby deduct on his Federal income tax return?

Accepted Answer

Bobby cannot deduct any of the expenses

Question 20

Under what circumstances may a taxpayer deduct the expenses of investigating a possible business acquisition, if (1) the business is not acquired; and (2) the business is acquired?

Accepted Answer

1() The expenses of investigation may be

Exam 6: Deductions and Losses: in General

Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?

If a taxpayer operated an illegal business (not drug trafficking), what expenses can be deducted and what expenses are disallowed?

Martha rents part of her personal residence in the summer for 3 weeks for $3,000. Anne rents all of her personal residence for one week in December for $2,500. Anne is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income.

Under the "one­year rule" for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment.

An expense need not be recurring in order to be "ordinary."

Only under limited circumstances can a loss on the sale of a personal use asset be deducted.

For a vacation home to be classified in the personal/rental use category, what attributes must be present?

Which of the following is incorrect?

If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is correct?

Two-thirds of treble damage payments under the antitrust law are not deductible.

If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity can be deducted in excess of the gross income from the activity.

Legal expenses incurred in connection with rental property are deductions from AGI.

The portion of a shareholder­employee's salary that is classified as unreasonable has no effect on the amount of a shareholder­employee's gross income, but results in an increase in the taxable income of the corporation.

For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business.

Bobby operates a drug trafficking business. Because he has an accounting background, he keeps detailed financial records. What expenses can Bobby deduct on his Federal income tax return?

Under what circumstances may a taxpayer deduct the expenses of investigating a possible business acquisition, if (1) the business is not acquired; and (2) the business is acquired?

An Introduction to Taxation and Understanding the Federal Tax Law

Working With the Tax Law

Computing the Tax

Gross Income: Concepts and Inclusions

Gross Income: Exclusions

Deductions and Losses: Certain Business Expenses and Losses

Depreciation, Cost Recovery, Amortization, and Depletion

Deductions: Employee and Self-Employed-Related Expenses

Deductions and Losses: Certain Itemized Deductions

Investor Losses

Tax Credits and Payments

Property Transactions: Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges

Property Transactions: Capital Gains and Losses, 1231, and Recapture Provisions

Alternative Minimum Tax

Accounting Periods and Methods

Corporations: Introduction and Operating Rules

Corporations: Organization and Capital Structure

Corporations: Distributions Not in Complete Liquidation

Corporations: Distributions in Complete Liquidation and an Overview of Reorganizations

Partnerships

S Corporations

Exempt Entities

Multistate Corporate Taxation

Taxation of International Transactions

Tax Practice and Ethics

The Federal Gift and Estate Taxes

Income Taxation of Trusts and Estates

Filters

Under the "oneyear rule" for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment.

The portion of a shareholderemployee's salary that is classified as unreasonable has no effect on the amount of a shareholderemployee's gross income, but results in an increase in the taxable income of the corporation.